There was a glorious time when shopping around was a lot more difficult, and the standard retail price formula was double wholesale equals retail. A lot has changed since then, and online marketplaces make prices tougher to nail down than it has ever been. The concept of retail pricing encompasses a lot to consider, but being well informed of all the challenges can help you make better choices about products that you retail.
Pricing is a complex subject, but no matter a retailer's opinion, a product is only worth as much as the public will pay, and online searches are the first place to learn more about consumer opinions.
It's a Searchable World
Any consumer in the world can stand in front of a shelf and quickly do a web search for the product and find the cheapest price. Geography doesn't matter anymore when online retailers offer free shipping.
So, as a retailer, that’s the first step for you too — get online and do a search for pricing ranges. If you’re selling something, know what the competition’s pricing is too. For retail price, find the price at which anything is listed for sale. The selling price, or market price, is for what it’s been bought — like how a house may list for $299,000 but sell for $274,000.
If you’re pricing for a brick-and-mortar retail space, be aware that pricing is just part of the magic. Service and decor influence your customer experience, and sometimes, having rock-bottom prices can do you harm by damaging your brand’s cachet, so don’t set out to join that race to the bottom. Instead, find a price point at which you can succeed while respecting your brand. It's easily said but often achieved through time and experience.
Retail Pricing Formulas
When searching, also look for the MSRP — the manufacturer’s suggested retail price. It's another great starting point, but obviously, others will undercut this price. Whatever you charge, you need to ensure that the price recoups all your costs: labor, overhead, shipping, insurance and anything else you pay month to month. Once you know the high and low prices for products, there are several strategies from which you can choose.
The basic formula to give yourself some perspective on what you need to earn is retail price – cost/retail price = retail margin percentage. So, turn overhead, insurance, labor and anything else you deem a cost of doing business into an estimated cost per transaction. You subtract that figure from the retail price, and the difference becomes the retail margin percentage, or what you need to earn on pretty much anything you sell.
It is tricky to figure out how much of your rent needs to be repaid on each $5 product you sell because every business's costs are different, and that’s why there are entire books about the subject of pricing. Some of it comes down to trial and error and what works best for your niche.
This is the old double the wholesale equals retail formula. This was the retail pricing golden rule for a long time, but the modern landscape — including mass production, online shopping and other factors — has made this unreliable. Today, keystone prices may make some products overpriced and others underpriced.
There’s the expected price of a product — say, a regular $2.99 retail price on a bag of gourmet chips — but then there’s discount pricing when sales are offered, typically between 10% and 30% off. Sales are great, but if you’re predictable or consistent with them, then discounting can deter shoppers from buying in between sales. Moderation with discounts is key.
Also thought of as “door crashers”, these are prices that are so low that not much profit might be made, but it’s a popular product that will bring people in, and they’ll spend money on other products. For the gourmet chips, maybe a loss-leading price means offering two bags for $3.29, or $1.64 each. It’s a calculated sales risk, but it’s popular because it works. Consumers are loyal to some brands, especially at 45% off.
Often, retailers might only give the great deal if shoppers also buy a complementary product, like two bags of chips for $3.29 but only if you buy a regular-priced dip by the same brand, offsetting the minimal profit made on the chips.
“We won’t be undersold!” has become a cliché claim these days, but many retailers offer price matching. Some retailers lead the race to the bottom by always undercutting their competition. They may have great success with it, but always underselling can be a damaging strategy for some, especially if they don't have stable suppliers and haven’t negotiated lower cost-per-unit prices.
In a famous study, economist Richard Thaler offered sunbathers at a beach two options involving buying the exact same beer — buying it at a savings from a rundown beach shop or overpaying at a posh, overpriced resort hotel. The majority favored paying more for the same beer at the hotel, shattering the notion that an informed consumer will always gravitate to lower prices.
It’s considered the “halo effect”, where consumers perceive a brand's products are higher quality and worth that extra premium because the brand encourages consumers to reach those conclusions through its packaging, decor, service, ambiance and other designer strokes. One could argue that this halo effect has been mastered by Apple for over 20 years to great success.
Amazon does this all the time — it posts a discount price with the regular price next to the item to create the impression of a good deal and to create urgency that this price may not last. "Act now!" Two retailers can sell the exact same product at the same discounted price, but the retailer showing only the sale price will usually sell less than a retailer showing both prices.
Anchor pricing, premium pricing and many other pricing strategies are all based on consumer psychology and behavioral economics.
The Psychology of Retail Pricing
There’s an old story about a manager selling turquoise jewelry with no success. She went home for the day and left the jewelry with a note for staff to mark it down by half price and blow it out. As the story goes, a sales associate misread the note, doubled the price and blew out the lot of it at the higher price.
The moral of the story is that sometimes adopting a race-to-the-bottom pricing strategy can turn off shoppers. People usually construe price as value and worth. This makes it difficult for retailers because it's hard to determine a “value” product versus the dreaded “cheap” product. There’s no easy answer for that, but the psychology behind all this is covered by behavioral economics — the study of why people buy what they do.
So, while there are about 15 common ways of working out a retail price, don’t just learn the formulas and math. Learn the thought processes behind shopping too. Look at books like "Priceless," "Buy-o-logy" and "Why We Buy" if you’d like to learn more on this fascinating topic.